Mahesh Pai explains whether one should book their profits or invest more according to their end-goals
When the pandemic hit the country, the Sensex fell to 27,500 points from 41,900 points. It was very difficult for anybody to predict what the future was holding for us, what with many people losing their income, but expenses remaining constant. After exhausting their money from their savings, the last option was to withdraw their investments. Many people had a huge part of their investments in the equity market that kept going lower and lower, they had lost their profits along with their invested capital, too. It was a dreadful situation; but as months passed by, the situation improved. People started getting their life together, companies started generating profits again and slowly the Sensex and Nifty started rising. The BSE benchmark took just 245 days to scale the journey from 50,000 points to 60,000 points in a covid economy. On 24th September when Sensex hit 60,000 points many investors started calling to ask whether they should book the profits or should they invest more at this level. This was not the first time I received such calls. I often experience this when there is a steep rise or a steep fall. I call this situation a dilemma. When there are two opposite choices and both appear to be right (or both wrong) it puts us into a dilemma and whenever we are in a dilemma we must get back to our principles, as only sound principles can guide us correctly. Principles are constant and are valid in all geographies. They work all times.
Question: Sensex at 60,000; Should I book profits now and cash out?
Suppose I answer yes. They sell their stocks now and book good profits. The markets undergo a correction and Sensex starts moving down, and then these people will be happy that they did the right thing in booking profits and if the market falls over the weekend then they will be very happy, pat themselves on their back and slight pat on my back for advising them. But if they had encashed as I had said, and then the market continued its rise and goes up even by 1000 points in the next fortnight, these people will be unhappy that they encashed (even after getting good profits) and mentally calculate their loses and feel bad that they did not hold on for some more time.
Suppose I had answered: No do not encash now, hold on. If the markets continue rising, they will feel glad that they did not sell their stocks, but still stay apprehensive that anytime markets can undergo correction, so better quit now. On the other hand if the markets turned red, and corrected by just 1000 points in the next fortnight these people will be unhappy that if they had encashed at 60,000 they would have earned better profits, even though they are still with handsome profits (notionally). The real question is ‘what is the correct answer? Should investors sell the equity in their portfolio? Should they invest further?’
The science of creating wealth is more dependent on one’s psychology and less on numbers and mathematical formulas. Before investing, one must begin with the end in the mind. Answering the below questions helps to gain clarity whether to stay invested or withdraw?
1) When will you need the money back?
2) How much money will be needed?
3) For what purpose will you require the money?
Plan your exit at the entry point itself. If this is done before then one will not be in any dilemma with Sensex reaching 60000. Money is not a need. Money is needed to serve a purpose. If one is chasing money, he will never be satisfied, for every time he makes money he will feel it is inadequate. If the same person is pursuing a goal and estimates the money needed to fulfil it, and finds way to make that money, he will enjoy making that money. Investors feel much more pain when they lose `100 than they feel pleasure when they gain `100.
Most of us are actually willing to take more risks to avoid a loss than we are willing to take to achieve a gain.
Let me conclude this article by answering the two questions:
1) Should I book profits, encash my equities?
My answer is: you can decide to do so based on two aspects:
- a) How far does your goal stretch (need for money for a specific purpose)? Suppose there are only 3 more years to go, then you better safeguard your profits and move the money towards safer investment avenues. Suppose there are 5 more years to reach, then you can gradually move out of equity towards debts averaging the cost month after month. For example the goal was to fund for daughter’s graduation in a University abroad. She has just entered her SSC, that leaves you with 3 years to get the money ready.
- b) Have you achieved your target amount for the goal? If you have achieved it, then irrespective of how much time you still have, get out of equity and safeguard the amount in risk free growth instruments.
2) Should I enter the equity market now? They say it is overheated
My answer is: Draw a map of life. Mark all major junctions that require big money. Classify the goals as ‘not negotiable goals and nice to have goals’. To fund the not negotiable goals, at the minimum level, never take the equity route. Take the risk free growth route. To fund the reasonable level goals, you can go in for equity investments. Try to structure portfolios individually for each of the major goals in life, under a common financial plan for the life. Take good professional help. Keep reviewing this once in 6 months, irrespective of the market movements. Follow the principles and escape the dilemma.